Customers Bancorp Reports Net Income For Second Quarter 2019

Business Wire 24-Jul-2019 4:15 PM

Strong Loan Growth, Expanded Net Interest Margin and Expense Control Expected to Show Strong Core Earnings Growth for Rest of 2019

Customers Bancorp, Inc. (NYSE:CUBI) the parent company of Customers Bank and its operating division BankMobile (collectively "Customers" or "CUBI"), today reported second quarter 2019 ("Q2 2019") net income to common shareholders of $5.7 million, or $0.18 per diluted share. Core earnings for Q2 2019, which excludes losses related to interest-only GNMA securities acquired from a mortgage warehouse customer of $7.5 million, totaled $12.1 million, or $0.38 per diluted share (a non-GAAP measure). Net interest margin, tax equivalent ("NIM") (a non-GAAP measure), expanded 5 basis points during Q2 2019 and average total loans and leases grew $570 million, or 7%, over first quarter 2019 ("Q1 2019").

• Customers Bank Business Banking segment reported Q2 2019 earnings per diluted share of $0.40, an increase of $0.02 per diluted share from Q1 2019. Customers Bank Business Banking segment Q2 2019 core earnings per diluted share of $0.61 (a non-GAAP measure) increased $0.23 per diluted share from Q1 2019.
• Notable charges during Q2 2019 totaled $8.3 million, or $0.20 per diluted share, including a $7.5 million loss realized upon the acquisition of certain interest-only GNMA securities that served as the primary collateral for a mortgage warehouse customer that unexpectedly ceased operations in Q2 2019, or $0.18 per diluted share, accrued severance expense of $0.5 million, or $0.01 per diluted share, and other securities losses of $0.3 million, or $0.01 per diluted share.
• NIM (a non-GAAP measure) expanded 5 basis points from Q1 2019 to 2.64% in Q2 2019; this marks our third consecutive quarter of NIM expansion from the trough of 2.47% reported in third quarter 2018 ("Q3 2018").
• Total assets were $11.2 billion at June 30, 2019, compared to $10.1 billion at March 31, 2019 and $11.1 billion at June 30, 2018. Total asset growth reflected a stronger than expected seasonal increase in mortgage warehouse loans outstanding.
• Total deposits increased $890 million, or 12.2%, year-over-year, which included a $592 million, or 34.5% increase in demand deposits. BankMobile's first White Label banking partnership deposit balances were approaching $50 million at June 30, 2019.
• Loan mix improved year-over-year, as commercial and industrial ("C&I") loans, excluding commercial loans to mortgage companies, increased $377 million, or 21%, and consumer loans increased $549 million. As planned, multi-family loans decreased $525 million, or 15%, year-over-year.
• Asset quality remains strong. Non-performing loans were only 0.15% of total loans at June 30, 2019 and reserves equaled 330% of non-performing loans. Net charge-offs were only $0.6 million, or 3 basis points of average total loans on an annualized basis, during Q2 2019.
• Reflecting growth in C&I and consumer loans, the provision for loan losses was $5.3 million in Q2 2019, compared to $4.8 million in Q1 2019 and a benefit of $0.8 million in second quarter 2018 ("Q2 2018").
• The BankMobile segment reported a loss per diluted share of $(0.22) in Q2 2019, compared to a loss per diluted share of $(0.10) in Q2 2018. Q2 2019 BankMobile segment results reflect an increase in provision for loan losses of $7.1 million, or $0.17 per diluted share, primarily as a result of increased consumer loan growth. Of the $386 million of consumer loan additions during Q2 2019, approximately $206 million was added in June 2019, with $155 million added on June 28, 2019, which impacted provision this quarter and will benefit net interest income in future periods.
• Q2 2019 book value per common share was $24.80 and tangible book value per common share (a non-GAAP measure) was $24.30. Tangible book value per common share has increased at a compound annual growth rate of 10.0% over the past five years.
• Based on the July 17, 2019 closing price of $19.65, Customers Bancorp common equity is trading at 0.81x tangible book value of $24.30 (a non-GAAP measure) and 7.3x the 2020 consensus estimate of $2.71.

Jay Sidhu, CEO and Chairman of Customers Bank stated, "We are pleased with improvements in core earnings and margin expansion this quarter, a reflection of strong loan growth and improved loan mix. We are also excited that BankMobile's first White Label partnership has generated nearly $50 million of very low-cost deposits to Customers. We expect White Label banking to add significant new customers and deposits to our bank over time."

Commenting on Q2 2019 notable items, Mr. Sidhu continued, "We were disappointed with the unexpected, abrupt shut down of one of our mortgage warehouse customers this quarter. We view this as an isolated event that is not indicative of the overall credit quality of our mortgage warehouse portfolio. We took possession of certain interest-only GNMA securities that secured our loan. The shortfall in the fair value of the interest-only GNMA securities resulted in a write-down of approximately $7.5 million. We are still planning to pursue all legal remedies to recover as much of this charge as possible. Separately, a severance charge of $0.5 million during the quarter resulted from our continued diligent analysis of staffing and de-emphasis of less profitable lines of business. We expect the staffing reductions to reduce annual compensation expense by at least $3 million. Other expense control initiatives related to our banking operations have been initiated and are expected to result in material cost savings in the second half of 2019."

Looking Ahead

Mr. Sidhu continued, "Customers expects core earnings per share to exceed $2.20 in 2019, in line with or ahead of most Street estimates. The planned commercial and consumer loan growth in 2019 requires upfront provision expense. This provision expense caused a drag on Q1 2019 and Q2 2019 earnings and provision expense is expected to be lower in the second half of 2019. Earnings should accelerate starting in Q3 2019. For 2020, Customers is projecting core earnings per share of at least $3.00, an increase of about 45% from the current 2019 consensus estimates.

Net interest margin is now expected to increase over 15 basis points during the second half of 2019 to 2.80% by Q4 2019, with full-year 2019 net interest margin above 2.70%. Average interest earning assets for 2019 are expected to be roughly equal to 2018 average interest earning assets. Core non-interest income is expected to grow approximately 10% - 20% from 2018 and the core efficiency ratio for full-year 2019 is expected to be in the mid-60%s. C&I loans, excluding loans to mortgage companies, are expected to grow over $500 million in 2019, while consumer loans are expected to be approximately 80% of average BankMobile deposits and less than 7.5% of Customers Bank Business Banking segment loans. Core deposit growth is expected to maintain the same pace in the second half of 2019 as the first half of 2019. Continued growth in retained earnings is expected to provide flexibility to call preferred equity as it becomes callable beginning in 2020 and to consider common stock buybacks if CUBI continues to trade below market multiples."

Mr. Sidhu continued, "We believe, at this time, we are on track to achieve core earnings per share in 2019 that meet or exceed Street expectations. Looking ahead, we expect a stronger second half of 2019 and expect core earnings per share to be $3.00 or higher in 2020 and to achieve a core return on average assets of 1.25% within 2-3 years."

Strategic Priorities

Improve Profitability: Target a 2.75% NIM by Q4 2019 and a 1.25% Core ROAA in 2-3 years

As stated during our 2018 Analysts Day in October 2018, Customers expects to keep average total assets relatively flat in 2019, with a focus on growing its core businesses, while improving margins, capital, and profitability. Through favorable mix shifts in both assets and liabilities, Customers expects to improve the overall quality of its balance sheet and deposit franchise, expand its net interest margin, enhance liquidity and improve interest rate sensitivity.

• Target core return on average assets ("ROAA") in top quartile of peer group, which we expect will equate to a ratio of 1.25% or higher over the next 2-3 years.
• Achieve NIM expansion to 2.75% or greater by Q4 2019, with a full year 2019 NIM above 2.70%, through an expected shift in asset and funding mix. We now expect NIM to be 2.80% for Q4 2019.
• BankMobile growth and maturity expected to enhance profitability; we expect BankMobile to be profitable by Q4 2019.
• Expense control; we expect very modest growth in most Customers Bank Business Banking segment expenses during 2019, and incremental spend in other areas will be driven by revenue growth or new business or technology initiatives at BankMobile.
• Core deposit and good quality higher-yielding loan growth are strategic priorities. Customers currently has $1.9 billion of loans with yields below 3.75% at June 30, 2019, of which $1.6 billion are multi-family loans. Over the next two years, we expect to run-off these lower-yielding multi-family loans and will replace them with higher-yielding interest earning assets. During the second half of 2019, we plan to continue reducing this portfolio by $1 billion or more.
• Maintain strong credit quality and superior risk management. We do not see any material deterioration on the asset quality front. The Bank is relatively neutral to interest rate changes at June 30, 2019.
• Evaluate opportunities to redeem our preferred stock as it becomes callable or buy back our common stock, if that is a better option. Redeeming all of the preferred stock as it becomes callable would add approximately $0.45 to our diluted earnings per share.

Focus on Capital Allocation

The tangible common equity to tangible assets ratio (a non-GAAP measure) was 6.8% at June 30, 2019, while the leverage ratio was 9.5%. These ratios are higher than last year, but declined from March 31, 2019 due to higher seasonal asset levels. "We anticipate having excess capital above our targeted minimum tangible common equity ratio of 7.0% at year-end, which gives us options," Sidhu stated. "As capital builds, we will evaluate the best uses for our excess capital, which may include common stock buybacks or calling our preferred equity as it becomes callable, starting in 2020," Sidhu continued.

BankMobile Segment is Expected to Generate a Positive Earnings Contribution by Q4 2019

BankMobile, a division of Customers Bank, operates a branchless digital bank offering low cost banking services to approximately 1.0 million active deposit customers. Customers reported in Q4 2018 that it expects to retain BankMobile for a 2-3 year period, but will regularly evaluate the best options for BankMobile. "We expect to update the market about our current plans for BankMobile sometime during Q4 2019," stated Sidhu.

BankMobile deposits averaged $489 million in Q2 2019, with an average cost of just 0.17%. The Q2 2019 segment net loss increased to $7.1 million, or $(0.22) per diluted share, compared to a net loss of $3.3 million, or $(0.10) per diluted share in Q2 2018, principally due to an increase in the provision for loan losses of $7.1 million driven from upfront provisions for consumer loans added to the BankMobile segment during Q2 2019. BankMobile is expected to generate a positive contribution to Customers' earnings in Q4 2019, given consumer loan growth, expected core deposit growth, and fee changes to its student disbursement business which will be fully implemented in Q3 2019. These fees are waived for customers that meet minimum monthly deposit requirements, as part of BankMobile's goals of creating customers for life with very low cost banking products. The new fees help balance that strategy with the need to cover costs from more transactional accounts and encourage customers to use BankMobile as a primary banking relationship.

In late November 2018, BankMobile's first White Label banking partnership went live in a beta test phase, making BankMobile's best in class banking products available to the partner's broad customer base, and on April 18, 2019, the partner made a public announcement and began the first phase of national digital marketing efforts. The partnership has generated nearly $50 million in deposits.

Q2 2019 Overview

The following table presents a summary of key earnings and performance metrics for the quarter ended June 30, 2019 and the preceding four quarters, respectively:

Net Interest Income

Net interest income totaled $64.7 million in Q2 2019, an increase of $5.4 million from Q1 2019, primarily due to a $0.6 billion increase in average interest-earning assets and a 5 basis point expansion of NIM. Compared to Q1 2019, total loan yields increased 14 basis points to 4.62%. The cost of interest-bearing deposits increased by 8 basis points. Borrowing costs increased 11 basis points to 3.09% due to an increase in longer-term borrowings. Total deposit and borrowing costs were 2.04% for Q2 2019, up 9 basis points from 1.95% for Q1 2019.

Q2 2019 net interest income decreased $2.6 million from Q2 2018 primarily due to a $0.5 billion reduction in average interest-earning assets, offset in part by 2 basis points of NIM expansion. Compared to Q2 2018, total loan yields increased 27 basis points to 4.62%. Total investment securities yields increased 55 basis points to 3.77% mostly due to the sale of $495 million of lower-yielding securities in Q3 2018 and run-off of other lower-yielding securities. Given Federal Reserve interest rate hikes in 2018 and the associated increases in market interest rates, the cost of deposits and borrowings increased 51 basis points to 2.04% for Q2 2019, up from 1.67% for Q2 2018.

Total loans increased $608 million, or 6.7%, to $9.7 billion at June 30, 2019 compared to the year-ago period. C&I loans increased $377 million to $2.1 billion, commercial loans to mortgage companies increased $67 million to $2.1 billion; residential mortgages increased $160 million to $655 million; consumer loans increased $549 million to $553 million; and commercial real estate non-owner-occupied loans increased $20.6 million to $1.2 billion. These increases were offset in part by a planned decrease in multi-family loans of $525 million, or 14.8%, to $3.0 billion.

Total deposits increased $890 million, or 12.2%, to $8.2 billion at June 30, 2019 compared to the year-ago period. Total demand deposits increased $592 million, or 34.5%, to $2.3 billion, certificates of deposit accounts increased $366 million, or 17.7%, to $2.4 billion, and savings deposits increased $491 million to $530 million. In July 2018, Customers launched a new digital, on-line savings banking product with a goal of gathering retail deposits. As of June 30, 2019, this new product generated $479 million in retail deposits, an increase of $118 million since March 31, 2019. Higher cost money market deposits decreased $559 million, or 16.1%, to $2.9 billion at June 30, 2019 compared to the year-ago period.

Provision, Credit Quality and Risk Management

The provision for loan losses totaled $5.3 million in Q2 2019, compared to $4.8 million in Q1 2019 and a benefit of $0.8 million in Q2 2018. The Q2 2019 provision expense included $8.0 million for net growth in the consumer and C&I loan portfolios, net of the multi-family loan run off, and $0.1 million for impaired loan provisions, offset in part by a release of reserve of $2.9 million resulting from lower expected credit losses than previously estimated. Net charge-offs for Q2 2019 were $0.6 million, or 3 basis points of average loans on an annualized basis, compared to net charge-offs of $1.1 million, or 5 basis points in Q1 2019, and $0.4 million, or 2 basis points in Q2 2018.

Risk management is a critical component of how Customers creates long-term shareholder value, and Customers believes that asset quality is one of the most important risks in banking to be understood and managed. Customers believes that asset quality risks must be diligently addressed during good economic times with prudent underwriting standards so that when the economy deteriorates the bank's capital is sufficient to absorb all losses without threatening its ability to operate and serve its community and other constituents. "Customers' non-performing loans at June 30, 2019 were only 0.15% of total loans, compared to our peer group non-performing loans of approximately 0.74% in the most recent period available, and industry average non-performing loans of 1.13% in the most recent period available. Our expectation is superior asset quality performance in good times and in difficult years," said Mr. Sidhu.

Non-Interest Income

Non-interest income totaled $12.0 million in Q2 2019, a decrease of $7.7 million compared to Q1 2019. The decrease in non-interest income primarily reflects a $7.5 million loss on the shortfall in the fair value of the interest-only GNMA securities acquired from a commercial mortgage warehouse loan customer that unexpectedly shut down operations in May 2019 and a seasonal decrease of $2.0 million in interchange and card revenue, offset in part by increases of $1.1 million in deposit fees, $0.4 million in mortgage warehouse transactional fees, and $0.3 million in commercial lease income. The decrease in interchange and card revenue primarily resulted from a seasonal decrease in activity at BankMobile, coinciding with the end of the academic semester, partially offset by higher negotiated fee sharing rates with our debit card processor. The increase in deposit fees primarily resulted from an increase in service charges on some deposit accounts relating to a change in the fee structure at BankMobile. The increase in mortgage warehouse transaction fees primarily resulted from a seasonal increase in activity volumes. The increase in commercial lease income primarily resulted from the continued growth of our Equipment Finance Group.

Non-Interest Expense

Non-interest expense totaled $59.6 million in Q2 2019, an increase of $5.6 million compared to Q1 2019. The increase in non-interest expense primarily resulted from increases of $1.1 million in professional services, $1.1 million in salaries and employee benefits, $0.8 million in other non-interest expenses, $0.7 million in provision for operating losses, and $0.5 million for technology-related costs. The increase in professional services and other non-interest expenses primarily resulted from our ongoing investment in our White Label partnership. The increase in salaries and employee benefits primarily resulted from additional working days compared to the prior quarter, severance payments related to a reduction of headcount, primarily in less profitable business lines, and an increase in headcount at BankMobile.

Tax

Customers' effective tax rate was 21.1% for Q2 2019, compared to 23.8% for Q1 2019 and 22.4% for Q2 2018. The decrease in the effective tax rate from Q1 2019 and Q2 2018 was primarily driven by a favorable return to provision adjustment recorded during Q2 2019. Customers expects the full-year 2019 effective tax rate to be approximately 22% to 24%.

Significantly Lowering Commercial Real Estate Concentration

Customers' total commercial real estate ("CRE") loan exposures subject to regulatory concentration guidelines of $4.2 billion as of June 30, 2019 included construction loans of $78 million, multi-family loans of $3.0 billion, and non-owner occupied commercial real estate loans of $1.1 billion, which represent 340% of total risk-based capital on a combined basis, a reduction from a 392% commercial real estate concentration as of June 30, 2018. Customers' loans subject to regulatory CRE concentration guidelines had a 3 year cumulative reduction of 7.6% in Q2 2019, a deceleration from cumulative growth of 46.3% a year ago.

Customers' loans collateralized by multi-family properties were approximately 31.0% of Customers' total loan portfolio and approximately 246% of total risk-based capital at June 30, 2019, down from approximately 38.9% and 294%, respectively, at June 30, 2018. Following are some key characteristics of Customers' multi-family loan portfolio:

• Principally concentrated in New York City with an emphasis on properties subject to some type of rent control; and principally to high net worth families;
• Current average loan size is $6.9 million;
• Current weighted average annual debt service coverage ratio is 1.52x;
• Current weighted average loan-to-value for the portfolio is 62.3%;
• All loans are individually stressed with an increase of 1% and 2% to the cap rate and an increase of 1.5% and 3% in loan interest rates;
• All properties are inspected prior to a loan being granted and inspected thereafter on an annual basis by dedicated portfolio managers or outside inspectors; and
• Credit approval process is independent of customer sales and portfolio management process.

Conference Call

Please dial in at least 10 minutes before the start of the call to ensure timely participation. Slides accompanying the presentation will be available on Customers' website at https://www.customersbank.com/investor-relations/ prior to the call.

Please submit any questions you have regarding the earnings in advance to rramsey@customersbank.com and the executives will address them on the call. Customers will also open the lines to questions following management's presentation of the second quarter results. A playback of the call will be available beginning July 24, 2019 at 8:00 PM EDT until 8:00 PM EDT on August 23, 2019. To listen, call within the United States 888-203-1112, or 719-457-0820 when calling internationally. Please use the replay passcode 9112020.

Institutional Background

Customers Bancorp, Inc. is a bank holding company located in Wyomissing, Pennsylvania engaged in banking and related businesses through its bank subsidiary, Customers Bank. Customers Bank is a community-based, full-service bank with assets of approximately $11.2 billion at June 30, 2019. A member of the Federal Reserve System with deposits insured by the Federal Deposit Insurance Corporation, Customers Bank is an equal opportunity lender that provides a range of banking services to small and medium-sized businesses, professionals, individuals and families through offices in Pennsylvania, the District of Columbia, Illinois, New York, Rhode Island, Massachusetts, New Hampshire and New Jersey. Committed to fostering customer loyalty, Customers Bank uses a High Tech/High Touch strategy that includes use of industry-leading technology to provide customers better access to their money, as well as Concierge Banking® by appointment at customers' homes or offices 12 hours a day, seven days a week. Customers Bank offers a continually expanding portfolio of loans to small businesses, multi-family projects, mortgage companies and consumers.

Customers Bancorp, Inc.'s voting common shares are listed on the New York Stock Exchange under the symbol CUBI. Additional information about Customers Bancorp, Inc. can be found on the Company's website, www.customersbank.com.

"Safe Harbor" Statement

In addition to historical information, this press release may contain ''forward-looking statements'' within the meaning of the ''safe harbor'' provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements with respect to Customers Bancorp, Inc.'s strategies, goals, beliefs, expectations, estimates, intentions, capital raising efforts, financial condition and results of operations, future performance and business. Statements preceded by, followed by, or that include the words ''may,'' ''could,'' ''should,'' ''pro forma,'' ''looking forward,'' ''would,'' ''believe,'' ''expect,'' ''anticipate,'' ''estimate,'' ''intend,'' ''plan,'' or similar expressions generally indicate a forward-looking statement. These forward-looking statements involve risks and uncertainties that are subject to change based on various important factors (some of which, in whole or in part, are beyond Customers Bancorp, Inc.'s control). Numerous competitive, economic, regulatory, legal and technological factors, among others, could cause Customers Bancorp, Inc.'s financial performance to differ materially from the goals, plans, objectives, intentions and expectations expressed in such forward-looking statements. In addition, important factors relating to the acquisition of the Disbursements business, the combination of Customers' BankMobile business with the acquired Disbursements business, the implementation of Customers Bancorp, Inc.'s strategy to retain BankMobile for 2-3 years, the possibility that the expected benefits of retaining BankMobile for 2-3 years may not be achieved, or the possible effects on Customers' results of operations if BankMobile is never divested could cause Customers Bancorp's actual results to differ from those in the forward-looking statements. Customers Bancorp, Inc. cautions that the foregoing factors are not exclusive, and neither such factors nor any such forward-looking statement takes into account the impact of any future events. All forward-looking statements and information set forth herein are based on management's current beliefs and assumptions as of the date hereof and speak only as of the date they are made. For a more complete discussion of the assumptions, risks and uncertainties related to our business, you are encouraged to review Customers Bancorp, Inc.'s filings with the Securities and Exchange Commission, including its most recent annual report on Form 10-K for the year ended December 31, 2018, subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K, including any amendments thereto, that update or provide information in addition to the information included in the Form 10-K and Form 10-Q filings, if any. Customers Bancorp, Inc. does not undertake to update any forward-looking statement whether written or oral, that may be made from time to time by Customers Bancorp, Inc. or by or on behalf of Customers Bank.